The National Debt Bomb – $29.5 Trillion and Growing As Of This Filming
I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group and it’s the new year. First off, the team at Oak Harvest appreciates your support and we appreciate you tuning into our you-tube retirement planning videos as well as our weekly investment “News or Noise” and “Keeping you connected to you Money” podcasts. If you like our content, we would welcome you referring our channels to your friends and family.
We released our first half 2022 outlook, on December 3rd under the title “Curb your Enthusiasm Yields to a Bull Market Buy”. It can be found on our website at OakharvestFG.com or in video format on our You-Tube channel. Check it out.
Over the last 3 years of doing investment podcasts with our team at Oak Harvest, we’ve taken on several viewer requested topics. One that keeps coming up time and time again, is our thoughts on the national debt. Well, today’s topic is my thoughts on just that: so, I’m titling this week’s podcast, The national Debt bomb, $29.5 trillion and growing, it has a shorter fuse each year.
So first a quick lesson on deficits and debt. America runs a budget deficit every year it spends more money than it generates in revenue. When spending exceeds revenue, the US Treasury department issues, or sells Treasury bonds, bills and notes to fund this deficit shortfall. There are 5 main sources of federal tax revenue. They are individual income taxes (53%), payroll taxes (32%), also known as social security, corporate income taxes(7%), excise taxes and tariffs.
In the short term, borrowing money and deficit spending and its resultant debt can boost economic growth, especially if the country is in a recession. The federal government may step in and supplement or supplant prior private market spending that has slowed or dried up during a recession with federally funded fiscal programs.
Whether the money goes to fighting wars and buying jet fighters as it did under President Bush for his 2 terms, goes to healthcare spending like Obamacare, “shovel ready infrastructure”, and “cash for clunkers” programs under Obama’s 2 terms, or “tax cuts” then “covid relief” programs as were the case under President Trump does not matter much. Debt is debt and both principal and interest on it eventually must be refinanced and or repaid. And the bigger the debt load a country or company has on its balance sheet relative to its revenue and profit potential, the less ability it must 1-be flexible when new crises hit, 2 – make good on its current outstanding commitments, or 3 – and most importantly to future prosperity take on actual growth enhancing high value projects.
Listeners, my first job out of Georgia Tech in 1988 in the world of finance was as an analyst on a team investing in leveraged buyouts. Retrospectively, it was a great training ground to see what has been transpiring in Washington DC over the last 30 years under both parties control, both Democrats and Republicans. Viewers, both were equally as responsible for our current $29.5 trillion in debt. The current debt hole that our country is in was dug by both parties previous and current political leadership.
They were singularly in charge of and responsible for both the overspending and under taxing of their voting blocs as they collectively controlled politics and our country the last 3 decades.
The current debt burden is an anchor on the growth of the future America. It will be a generational gift and heavy weight that these baby boom era politicians leaves their children and grandchildren to restructure or pay down.
In a private market LBO or leveraged buyout, companies purposely take on a high debt burden to focus management attention on gaining efficiency, raising profitability, and focusing the company on the highest and best use of its assets as debt has first claim on assets should things turn south, and a company enter bankruptcy.
However, to date, or at least for the last 30 years, this limiter, or governor of behavior that high debt loads usually install on management teams haven’t been placed yet on our federally elected officials. Both parties have been equally as bad at borrowing and adding to our country’s debt burden. I’ve included a few charts and tables breaking down deficits and debt by President for the last 30 years. Viewers, both parties are equally as bad at balancing a budget in my eyes. The data doesn’t lie. They can spin it as dollars, or percent increases or percentage of GDP, but in the end, both political parties have been disasters on holding to a budget for 30 years.
Over time, as debt continues to grow, our creditors might become concerned about how the US Government will repay any funds it owes. Over time, our creditors might demand higher interest rates on Treasury securities to compensate them for the higher risk of default. In the future, higher base Treasury rates could dampen economic growth as corporate America’s borrowing rates are set against the perceived “riskless” US Treasury interest rate.
Other issues might occur in the future. Maybe federal government officials let the value of the dollar fall in order to pay back our debt with cheaper dollars. Ultimately, foreign investors that hold much of our debt, like China, might be less willing to buy our bonds which would force interest rates higher.
Do our countries deficits and debts concern me as a citizen and taxpayer, 1000% they do? Do I think as a portfolio manager and investor, they are something to worry about for the financial markets and our overall economy over the next 1 or 2 years? Not at all.
Do I have an answer on how to reverse and solve this problem that seems to grow larger and closer to tipping point every year? Yes. I think we all know what the answer is to this simple math equation. However, almost no one I speak to likes the answer as it is hard medicine and requires sacrifice. Hard medicine that I imagine that vast majority of the wealth in America won’t like.
What’s that? 1- Simplify the tax code to make the rules easier to follow and harder to avoid. Sorry, liberals, those aren’t tax “loopholes” you speak of, they are laws and rules, and the private markets are smarter than our “public servants” writing the tax code. 2 – implement higher marginal taxes on every income class in America. I mean everyone. Make everyone, including lower income levels and the ultra-rich have more of a personal interest in our country’s future, not immediate success. And 3- raise and enforce higher corporate tax rates. Sounds easy but imagine few politicians will dare run on this platform as the “big money” behind todays political campaigns would be terrified of such a platform.
If we do not do these things in the near future, I imagine what will happen down the road is that in 5 or 10 years, possibly sooner, some new Millennial or Gen Z political leadership will see that the easiest, most equitable, and least economically hurtful to the most people way to pay down the debt in America is to tax wealth as it passes generational from those who benefited the most from our massive debt balloon to those who are being burdened by it in the future, that would be Millennials and Gen Zrs who are driving our economy and will continue to do so for another 20 to 40 years..
From the whole team at Oak Harvest, thank you for your support and trust throughout 2021, and we hope we can continue to be your partner and provide you with value added service in 2022.
And Viewers, feel free to give us a call here to speak to one of our advisors. Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.
On Oct. 1, 2021, at the end of fiscal year 2021, the national debt was $28.4 trillion. Between the end of fiscal year 2020 and the end of fiscal year 2021, the national debt grew $1.5 trillion, a 5.6% increase year over year.1 For fiscal year 2022, President Biden’s budget includes a deficit of $1.84 trillion, which could grow the national debt to over $30 trillion by Oct. 1, 2022, when fiscal year 2023 begins.8
At the end of fiscal year 2020, the debt was $26.9 trillion. Trump added $6.7 trillion to the debt between fiscal year 2017 and fiscal year 2020, a 33.1% increase, largely due to the effects of the coronavirus pandemic and 2020 recession.
In his FY 2021 budget, Trump’s budget included a $966 billion deficit.9 However, the national debt actually grew by $1.5 trillion between Oct. 1, 2020, and Oct. 1, 2021.
President Obama added about $8.6 trillion, about a 74% increase, to the national debt at the end of President Bush’s last budget in 2009.
George W. Bush
President Bush added $5.85 trillion to the national debt, a 101% increase from the $5.8 trillion debt at the end of Clinton’s last budget for fiscal year 2001.
President Clinton increased the national debt by almost $1.4 trillion, almost a 32% increase from the $4.4 trillion debt at the end of President H.W. Bush’s last budget.5
George H.W. Bush
President H.W. Bush added $1.55 trillion to the debt, a 54% increase from the $2.857 trillion debt at the end of Reagan’s last budget.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.